Trading with Europe

How much difference will Brexit make to the UK’s trade with the EU27? Most likely there will be some change but not nearly as much as some people fear.

The most probable outcome to the current trade negotiations still seems to be a free trade agreement along the lines of CETA, the terms negotiated by the EU with Canada. This would involve almost totally tariff-free trade on goods, including most agricultural products, but with rather greater limitations on services – much as at the moment. If we were outside the Single Market, as is currently government policy, the paperwork involved would be a little more complicated than it is at the moment, but not that much. The biggest change would be that certificates of origin would be required, as happens now with the vast majority of world trade. With pre-clearance, trusted traders and the Authorised Economic Operator (AEO) system all in place, hold-ups would be minimal. HMRC is confident that they could make this all work. Estimates of the extra costs involved, compared to existing ‘free movement’, hover around 1% of the value of the trade concerned.

It is possible – although unlikely – that we will not secure a free trade deal in which case WTO tariffs would apply. This has been portrayed in some quarters as being a disastrous outcome but this is surely an absurd exaggeration. It would be disappointing to have tariffs on trade between the UK and the EU27 re-imposed, but on industrial goods the average import duty would only be about 2.5%. If agricultural products are included, he average rises to about 4%, but if services ae included it drops back again to around 2.5%.

If, on the other hand, we were to stay in the Single Market, we should be able to continue with “free movement”, but very probably at the cost of continuing high levels of net contributions to the EU budget (£9bn in 2017), no restraints on EU immigration, and continuing EU regulation over which, as non-members, we would have no control. This would look like a very poor deal to the 52% of the electorate which voted for Brexit in June 2016.

How would these options look when measured against the key wider criteria by which they are likely to be judged? Would trade, especially the sections of it involving tightly managed supply chains, be disrupted? Would trade diminish, thus losing us the benefits from specialisation from which the benefits from trade essentially arise? Would we lose out as the EU27 sold much more to us than we to them?

Getting goods through a border quickly and reliably is essentially a management problem. It will help that ‘Just in Time’ operations are almost entirely conducted by trusted traders, not by small time operators who are likely to need checks. The fact that large volumes of world trade involving supply chains are conducted across WTO borders shows that it is perfectly possible to overcome any potential problems.

Are we likely to see trade between the UK and the EU27 diminishing significantly? Why should it? If trade is really worth doing it is unlikely to be inhibited by a -1% increase in costs – and if it is that sensitive, it must barely be worth doing anyway. After the EU referendum, sterling fell to $1.22. It is now around $1.40. If this 15% increase has had almost no impact on total trade volumes, which is what the trade figures tell us, why should any of the potential Brexit outcomes make a larger difference?

There is a factor relating strongly to trade, however, which needs to have much more attention paid to it than it has apparently so far been the case. The UK has a massive balance of payments deficit with the EU2, running at around £100bn a year for the last few years – 5% of UK annual GDP. This is dragging the UK economy down in the short term, and is entirely unsustainable looking ahead. The only way to overcome this problem is for the UK to have a much more competitive exchange rate generally, but particularly against the euro. When are we going to wake up to this pressing requirement?